2017 lessons for Directors from the courts and Fair Work Commission

Wednesday, 13 December 2017

Lysane Pelling
Senior Policy Adviser, Australian Institute of Company Directors

    Reflecting on a number of decisions handed down by the courts and Fair Work Commission in 2017 provides useful insights into the duties and rights of directors.

    AICD 2017 Lessons from the courts2:15

    Directors on notice about potential corporate misconduct risk breaching their duty of care if they fail to make adequate inquiries; it is not sufficient to merely rely on the judgment of others.

    As noted in a previous edition of the Boardroom Report (12 April 2017), the former chairman of AWB Limited (AWB) Trevor Flugge was found to have breached his statutory duty of care by failing to make adequate inquiries about the propriety of certain payments made by AWB to the Iraqi Government in connection with the United Nations ‘Oil-for-Food Program’.

    Crucial to the Court’s decision was its finding that Mr Flugge had been made aware of allegations of illegal payments by AWB during a meeting with the Australian Trade Commission, and subsequently failed to make adequate inquiries about the payments to determine their propriety. Mr Flugge’s reliance on the assurances of the Managing Director in regards to the payments did not, held the Court, relieve him of his duty to make proper inquiries.

    The Court imposed a $50,000 penalty on Mr Flugge and disqualified him from managing corporations for a period of five years. Although the Court found that Mr Flugge had acted honestly, his application to be relieved from liability was denied because the breach of duty was ‘not a minor or accidental breach of duties that could be excused.’

    (ASIC v Flugge & Geary [2016] VSC 779 (main judgment) and ASIC v Flugge (No 2) [2017] VSC 117 (penalty judgment))

    Criminal sanctions can flow for directors who aid and abet an entity’s continuous disclosure breach by authorising the release of the false information or failing to have it corrected.

    In late 2016, the former executive chairman of Waratah Resources Ltd (WRL) Benjamin Kirkpatrick was convicted of aiding and abetting WRL to breach its continuous disclosure obligations and of providing false information to the market.

    Mr Kirkpatrick had authorised a company announcement on 14 October 2013 which asserted WRL had established a $100 million trade finance facility with the Bank of China, however no such facility had been established or agreed on. The announcement was not corrected until 11 days later.

    After pleading guilty to the charges of misleading the market, Mr Kirkpatrick was sentenced in January 2017 to 12 months imprisonment, to be served as a 12-month intensive correction order. This conviction automatically disqualified Mr Kirkpatrick from managing a corporation for five years.

    (ASIC media release 17-018MR)

    Shareholder ratification obtained after full disclosure may provide a defence to directors’ breach of general law duties, but not their statutory duties.

    FAL Healthy Beverages Pty Ltd (FAL HB) and its subsidiary successfully claimed that Timothy Xenos, a former director and CEO of both companies, had breached his statutory and general law duties by causing those companies to make various payments that benefitted him.

    The Court rejected Mr Xenos’ claim that the transactions had been approved by the majority shareholder of FAL HB and himself in his capacity as a minority shareholder. In any event, Mr Xenos’ conflicts and the nature of the particular transactions had not been adequately disclosed to FAL HB’s major shareholder or its chairman so as to permit effective ratification of the transactions. Mr Xenos was therefore unable to avoid liability to FAL HB and its subsidiary on the basis of shareholder ratification or acquiescence.

    In handing down its judgment, the Court confirmed that:

    • Shareholders cannot release directors from their statutory duties. However, their acquiescence in a course of conduct might affect the practical content of those duties and be relevant to whether the impropriety necessary to establish a breach in fact existed. To the extent that ratification may narrow a duty owed by shareholders, so as to be relevant to determining whether a breach of a statutory duty is established, that will at least be limited by a requirement of disclosure, and may also be limited by public interest considerations; and
    • To constitute a defence to directors’ breaches of general law duties, the prior approval or subsequent ratification of, or acquiescence in, the relevant transactions by shareholders must occur after full disclosure to them of all the material circumstances, including the character of the transactions and the nature of the relevant conflict.

    Mr Xenos was ordered to pay just over $1 million to FAL HB and FAL Retail.

    (In the matter of FAL Healthy Beverages Pty Ltd and FAL Retail Pty Ltd [2017] NSWSC 476)

    While the fiduciary relationship between directors and a company may in some circumstances be qualified so that the duty to avoid conflicts of interests does not apply, the mere absence of an exclusivity arrangement does not permit directors to divert opportunities to competing businesses they carry on.

    A former director and former officer of DTM Constructions Pty Ltd trading as QA Developments (QA), Justin Poole and Darryl Hopkins, were held to have breached several statutory and general law duties by diverting business opportunities from QA to companies in which they held an interest.

    In reaching this conclusion, the Court held that the absence of evidence that Mr Poole and Mr Hopkins had specifically agreed to refer business to only QA did not mean the duty to avoid conflicts of interests did not apply to them. The Court held that the issue of exclusivity is but one element which needs to be considered in determining the scope of the fiduciary relationship between the parties and whether there had been a breach of duties.

    The Court did not find any evidence that Mr Poole and Mr Hopkins were expressly authorised by QA to refer business opportunities to parties other than QA. Nor did the Court find that the nature of the relationship between the parties such that it meant QA had effectively assented to Mr Poole and Mr Hopkins’ conduct.

    Due to the breaches, QA was entitled to equitable compensation for breaches of the fiduciary duty to avoid conflicts and statutory compensation for the breaches of the statutory duties to act in good faith and not misuse their corporate position or information.

    (DTM Constructions Pty Ltd trading as QA Developments v Poole [2017] QSC 210)

    A ruling by the Fair Work Commission indicates that directors may be able to seek anti-bullying orders.

    In a ‘landmark’ ruling, the Fair Work Commission (Commission) concluded that Trevor Anderson, the non-executive chairperson of the governing board of Anangu Pitjantjatjara Yankunytjatjara Inc (APY), was a ‘worker’ who was ‘at work’ for the purposes of the Fair Work Act 2009 (FW Act).

    Mr Anderson had applied to the Commission for an order to stop alleged bullying by APY’s general manager and deputy chairperson (Respondents). The Respondents countered that the Commission did not have jurisdiction in this matter because Mr Adamson was neither a ‘worker’ of APY nor ‘at work’ at the time of the alleged incidents. They argued that the term ‘worker’ in the FW Act ‘is not generally applied to a director or member of a governing board of an organisation unless that person is also subject to a contract of employment’.

    The Commission rejected this argument, instead finding that a ‘very wide approach’ to the definition of ‘worker’ is to be adopted, with the ‘essential element’ being the ‘undertaking of work’ for a person conducting a business or undertaking. The Commission held that, on the facts, the activities undertaken by Mr Adamson in attending to his duties as chairperson of APY represented the undertaking of work for APY. The fact Mr Adamson received relatively significant additional remuneration and expense payments as chairperson, while not decisive of the matter, was considered to be consistent with the conclusion that Mr Adamson was undertaking work for APY.

    As to the question of whether or not the alleged bullying occurred while Mr Adamson was ‘at work’, the Commission noted that being ‘at work’ is not limited to the confines of a physical workplace. A ‘worker will be “at work” at any time the worker performs work, regardless of his or her location or the time of day’. As Mr Adamson was carrying out his chairperson responsibilities at the relevant times, the Commission concluded that some or all of the alleged conduct, if it occurred, took place while Mr Adamson was ‘at work’ in his capacity as chairperson.

    Despite finding that Mr Adamson was a ‘worker’ who was ‘at work’, the Commission dismissed his application for a stop bullying order because Mr Adamson’s term on the APY board had expired and so (contrary to the requirements of the FW Act) he was not at a ‘future risk’ of being bullied at work.

    (Application by Adamson; Re Anangu Pitjantjatjara Yankunytjatjara Inc. [2017] FWC 1976)

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